Permissibility of Documentary Credit

The permissibility of documentary credit is based on the principle that it relies upon contracts that are valid according to the Shariah, such as Kafalah (personal guarantee), Wakalah (agency contract) and Qard (loan).

Shariah Categorization of Documentary Credit

The basis for the permissibility of irrevocable documentary credit is a combination of a contract of guarantee and agency. To these two the Qard (loan) transaction is to be added. It derives permissibility from the contract of mortgage (Rahn) as well, because it secures payment. The contract of guarantee creates a liability for payment, while agency determines the performance of acts relating to operations such as communication of the credit notification and initiation of operations pertaining to follow-up and examination of document. The loan element comes into operation when the institution pays on behalf of the client in case of documentary credit that is totally or partially uncovered.

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